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With $4 Trillion in Debt Coming Due, How Will Companies Use Their Tax Cut Cash?

ALKIS KONSTANTINIDIS

By Michael Rainey

May 9, 2018

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U.S. companies are carrying about $4 trillion in debt that needs to be refinanced over the next five years, according to a new analysis from Wells Fargo Securities. That’s about two-thirds of all outstanding corporate debt, and some analysts are worried about what could happen to businesses if interest rates keep rising over that period.

“Corporate America partied like never before on cheap money over the past decade, and now comes the hangover,” says Shelly Hagan of Bloomberg. That headache could come in the form of higher debt payments that would squeeze corporate balance sheets just as the economy begins to slow over the next year or two. Interest rates have been rising over the last few weeks, with the 10-year Treasury moving above 3 percent on Wednesday and the 2-year hitting 2.53 percent on Tuesday, its highest reading since 2008.

One wild card, though, is the role tax cuts will play. Will companies use their tax-cut cash to pay down debt, reducing the need to borrow as interest rates move higher? Or will they return their tax savings to investors with buybacks and dividends, leaving them just as dependent on debt, but at a higher price? The answer to those questions could have a big influence on how companies and the economy respond to the next downturn.